CEO Excellence: The Six Mindsets That Distinguish the Best Leaders from the Rest

Thank you for downloading this Simon & Schuster ebook. Get a FREE ebook when you join our mailing list. Plus, get updates on new releases, deals, recommended reads, and more from Simon & Schuster. Click below to sign up and see terms and conditions. CLICK HERE TO SIGN UP Already a subscriber? Provide your email again so we can register this ebook and send you more of what you like to read. You will continue to receive exclusive offers in your inbox. To Thomas, Gray, and Evening Czegledy Fiona, Lachlan, Jackson, and Camden Keller Mary, Malu, Devan, and Nik Malhotra And to our Partners and Colleagues at McKinsey & Company for giving us the opportunity to continue the search for excellence Introduction Excellence is never an accident. —Aristotle At the annual Leadership Forum hosted by McKinsey & Company in the picturesque waterfront town of St. Michaels, Maryland, thirty soon-to-be CEOs were gathered in the conference room. On this rainy fall evening, the retreat’s ?rst day, everyone snapped to attention as the moderator, Vik (one of your coauthors), posed an intriguing question: “What does a CEO really do?” Without pause, the ?rst guest speaker, a chief executive of one of the world’s largest technology companies, responded, “I can say with con?dence that the role of the CEO boils down to…” He then expanded on each of three items with conviction and clarity. At the end of the night, everyone left feeling a mysterious veil had been lifted. That is, until the following morning’s speaker, the leader of a multinational ?nancial services company, answered Vik’s same question. The guest articulated what she viewed as the three primary roles for a CEO, punctuating each with potent, reinforcing examples. They were an altogether di?erent set than o?ered by the ?rst night’s speaker. That evening, the third and ?nal CEO speaker, leader of one of the world’s most prestigious academic medical centers, presented—you guessed it—yet another categorically di?erent list of the three “most important” aspects of the CEO role. The next morning Scott and Carolyn (your two other coauthors) brought the retreat to a close, doing their best to crisply summarize the key takeaways. On the subsequent hour and a half drive to the nearest major airport, the three of us discussed how starkly di?erent each guest speaker’s list had been. We guessed that if we’d had a fourth speaker, we’d have yet another take on the CEO role. We all agreed that each piece of advice raised by our speakers was important and helpful, but in aggregate, the information felt disjointed. It was unsettling. As CEO counselors, we know that how a person performs in the CEO role matters. CEOs who rank in the top 20 percent of ?nancial performance generate, on average, 2.8 times more total return to shareholders (TRS) during each year of their tenure than do average performers. More concretely, if you invest $1,000 in a Standard and Poor’s (S&P) 500 index fund and over ten years your investment grows at historical averages, your investment will make you just under $1,600. If you invest in the companies led by the top quintile highest performing CEOs, you’ll gain more than $10,000. That’s a big di?erence.1 What’s more, the extent to which a CEO is a signi?cant predictor of a company’s performance has more than doubled since the mid-twentieth century.2 This “CEO e?ect” will undoubtedly become even more important in an increasingly volatile, uncertain, complex, and ambiguous world, one in which stakeholder capitalism is on the rise—calling leaders to move far beyond Milton Friedman’s notion that companies exist solely to create pro?ts for shareholders. In fact, the actions of today’s companies will likely have more impact on societal issues such as the environment, health care, wealth inequality, and human rights than those of governments and charitable organizations. By the time we got to the airport the three of us decided to work together to de?nitively answer the question: “What does a CEO really do?” That knowledge in itself would be extremely valuable. But we wanted to go beyond that, to ?nd out how the best CEOs work di?erently from the rest and why. This would mean getting deep inside the minds of those who truly excel in the role. Such an e?ort, we felt, would be welcomed by CEOs and their many stakeholders—boards, investors, employees, regulators, customers, suppliers, and communities. After all, in the past two decades, 30 percent of Fortune 500 CEOs have lasted less than three years, with two out of ?ve new CEOs failing in their ?rst eighteen months on the job.3 These leaders could certainly have bene?ted from a primer on what the role entails and that includes lessons gleaned from the best. By all counts the role is also getting harder. Today’s CEOs have to navigate far more than the traditional running of the business. They must deal with the exponentially accelerating pace of digital transformation and the workforce retraining and cybersecurity challenges that come with it. Leaders need to pay more attention to their employees’ health and well-being, racial diversity, and feelings of inclusion. Concerns around sustainability, the public desire for more purpose-driven organizations, and calls for CEOs to be spokespeople on broad societal issues are all on the rise. Leaders must not only hear those calls but be prepared for a level of public scrutiny and activism that is driven by social media and can spark outrage (rightly or wrongly) within a matter of hours. As a result, the probability that a CEO will crash and burn is now higher than ever. From 2000 through 2019, the average CEO tenure in the United States decreased from ten years to less than seven.4 In the same time frame, turnover rates globally have increased from roughly 13 percent to almost 18 percent.5 It goes to show that even when there’s a stable economy buoying bottom lines, the challenges to contend with at the top can be overwhelming. Add to this the reality that, as General Motors’ chief executive Mary Barra told us, “Becoming a CEO is unexpectedly lonely. I’ve always had a regular dialogue with whoever my leader was, and all of a sudden, you don’t have a leader to go to.” Of course, most of the problems faced by large, public company CEOs aren’t substantively di?erent from those faced by other leaders—whether they’re running a small business or a nonpro?t. Insights from the best CEOs running large companies, we felt, would be helpful for just about anyone. Bolstering that belief was the popularity of an article that Scott and Carolyn published on McKinsey’s website in the fall of 2019, “The Mindsets and Practices of Excellent CEOs,” which quickly became one of the most read articles of the year and has remained in the top ten ever since. Who Are the Best CEOs of the Twenty-First Century? What exactly does it mean to be a top-performing CEO? After all, aren’t a company’s results heavily in?uenced by factors outside of a CEO’s control? Yes, they are. In fact, more than half of the factors that determine a company’s ?nancial success—such as previous research and development (R&D) investments, inherited debt levels, geographic GDP growth, and industry trends —are largely out of a sitting CEO’s control. But that still means roughly 45 percent of what can drive results falls into the hands of one person: the CEO.6 We wanted to identify those CEOs who moved the needle most in those areas that can be in?uenced by the top leader. As the above chart shows, we started with a list of all CEOs who’ve led the one thousand largest public companies at some point during the last ?fteen years. There were more than two thousand of these. We then ?ltered this list based on tenure, removing any CEOs who spent less than six years in the role. That way we could ensure that those we targeted had a consistent track record of success. That brought our list to just under one thousand CEOs. Next, we ?ltered the list for those aspects of performance that the CEO can in?uence, adjusting for as many external factors as possible. We looked beyond absolute returns and chose those who, in their tenure, delivered results in the top two quintiles of “excess TRS” (the total return to shareholders in excess of the return their industry peers delivered, adjusted for geographical variations in growth). That narrowed the list to 523. From there we wanted to take into account factors such as the individual’s ethical conduct, employee sentiment, a company’s environmental and societal impact, the strength of its succession planning, and in the cases of those who’d retired, whether the business continued to outperform ?nancially in the years after the CEO stepped down. These measures are already rigorously incorporated into many existing “best CEO” lists such as the Harvard Business Review’s Top 100 CEOs, Barron’s Top 30 CEOs, CEOWORLD’s Most In?uential CEOs, Forbes’s America’s 100 Most Innovative Leaders, and Fortune’s Most Powerful Women in Business. We used an appearance on one or more of these lists as a further screen, which left us with 146 CEOs. There was one problem with this group, however: It was skewed heavily toward the white male pro?le that has prevailed in the business world for far too long. Only 8 percent were women and 18 percent were people of color. Further, the list was US-centric and underrepresented CEOs from certain sectors such as health care and energy, which doesn’t re?ect the topography of today’s global business landscape. We therefore opened the aperture to look for additional excellent CEOs in our underrepresented segments, while maintaining a high bar for performance and reputation. We included, for example, CEOs from outside of the largest one thousand companies (though still large in terms of generating billions of dollars in revenue or having many thousands of employees) who led remarkable transformations while delivering top-two quintile “excess TRS.” With this new screen, we were able to add almost 40 percent more women— CEOs such as Nancy McKinstry of Wolters Kluwer, who transformed the Dutch publishing house from a digital laggard to a leading provider of expert solutions and software with revenues of over $5 billion and almost twenty thousand employees worldwide. She was the top-rated female CEO in Harvard Business Review’s Top 100 CEOs list of 2019. Similarly, the number of people of color on our list rose by roughly 30 percent. In that group is Malaysian-born Lip-Bu Tan of Cadence Design Systems, a vendor to semiconductor and system companies. He took over the company in a period of turmoil and by the end of 2020 had increased its revenue to almost $2.7 billion and multiplied its stock market capitalization by more than thirty-eight times to almost $40 billion through a singular focus on the customer and a shrewd market expansion strategy. As we further balanced our mix across sectors and geographies, we also wanted to make sure that we included a sample of privately held ?rms and not- for-pro?ts that passed our performance and reputation bar. This led to the inclusion of CEOs such as Alain Bejjani of Majid Al Futtaim, who is shaping the in?uential, privately held Middle Eastern retail conglomerate as a global pioneer in customer experience. Majid Al Futtaim’s revenues have grown from $6.8 billion to almost $10 billion during his leadership, and the company employs over forty thousand people across sixteen countries. Toby Cosgrove of the not- for-pro?t Cleveland Clinic also made the list. He transformed the regional health network with $3.7 billion in revenues in 2004 into a preeminent multinational health system with $8.5 billion in revenues by the time he stepped down in 2017. In the end we added ?fty-four CEOs to our list to make it a round two hundred with a diversity of industries, geographies, genders, races, and ownership structures represented. Having done so, we now had our list of those we felt could most credibly be considered the best in the world in the twenty- ?rst century to date. Stunningly, we estimate that the economic value created by this group of two hundred leaders in excess of their peers is approximately $5 trillion. That’s equivalent to the annual gross domestic product of the world’s third largest economy, Japan. Our ?nal research step was a pragmatic one: Statistics told us that a sample size of at least sixty-?ve CEOs would yield a 95 percent con?dence level in our conclusions, and so we spent a year interviewing that many leaders in depth. (See appendix 2 for snapshot bios of all of the CEOs we interviewed.) Who then are our elite CEOs? When you think of the best, you immediately picture such iconic and outspoken founder-CEOs as Je? Bezos, Warren Bu?ett, Mark Zuckerberg, and Elon Musk. Yes—much has been written about them, and they indeed made our list of two hundred. However, in our review we purposefully minimized the number of founder-CEOs, given that their large ownership stakes often allow them much more freedom to act.